The Effect of Stock Liquidity on Cash Holdings: The Repurchase Motive

73 Pages Posted: 3 Jun 2019 Last revised: 5 Dec 2020

See all articles by Kjell G. Nyborg

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Zexi Wang

Lancaster University

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2019


We show that enhanced stock liquidity increases a firm’s propensity to hold cash using tick-size decimalization for identification. Our finding is surprising in light of the view that improved stock liquidity reduces financial constraints. As an explanation, we propose that there is a repurchase motive for holding cash. Higher stock liquidity strengthens this incentive. Consistent with this perspective, we show that firms with more liquid stock increase cash holdings relatively more around the introduction of safe harbor rules for repurchases. With respect to the effect of stock liquidity on cash holdings, therefore, our findings suggest that the repurchase motive dominates the real investments motive. We also show that this effect is not influenced by a firm’s relative ability to access to credit markets.

Keywords: Corporate cash holdings, Stock liquidity, Repurchases, Credit lines

JEL Classification: G32, G35, G10

Suggested Citation

Nyborg, Kjell G. and Wang, Zexi, The Effect of Stock Liquidity on Cash Holdings: The Repurchase Motive (June 1, 2019). Swiss Finance Institute Research Paper No. 19-30, Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: or

Kjell G. Nyborg (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
+41 (0)44 634 2980 (Phone)

Centre for Economic Policy Research (CEPR)

United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Zexi Wang

Lancaster University ( email )

Lancaster University Management School
Lancaster, LA1 4YX
United Kingdom

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